Can the G-7 (and the IMF) match Ken Rogoff?
I quite liked Ken Rogoff’s policy prescriptions for global rebalancing.
Specifically, I thought Rogoff got two key things right.
First, He recognizes that Europe already is contributing to global rebalancing. The euro is kind of strong, especially against Asian currencies. And recent European growth has been domestic demand-led growth. Eric Chaney:
the euro area is currently enjoying a robust recovery, essentially fuelled by domestic demand … Companies and consumers have proved more sensitive to the large monetary stimulus applied by the ECB since mid-2003 than most analysts had thought.
That demand growth is propelling exceptionally fast y/y growth in Eurozone imports – and has pushed the Eurozone current account into a significant deficit.
Consequently, Rogoff emphasizes the need for Europe to avoid taking policy actions – such as Germany’s VAT increase — that risk slowing European demand growth rather than supply-side reforms whose short-term impact on demand is ambiguous.
“Europe, for its part, could agree not to shoot its recovery in the foot with ill-timed new taxes such as those that Germany is currently contemplating.”
To be clear, I rather suspect Rogoff thinks Europe should also implement some supply-side reforms. But he didn't tie the case for those reforms to global rebalancing.
Second, Rogoff recognizes that the big current account surplus is now found in the world’s oil states. And he consequently calls on the oil states to do more to support global demand growth.
It seems the Saudis are now spending at rate more consistent with $35 a barrel oil than $25 a barrel oil. See Brad Bourland of SAMBA. That is a good thing – but there is still a bit of a gap between $35 and $70. And some other countries haven’t been as willing to spend as the Saudis.
The one thing Rogoff left out: the need for more exchange rate flexibility in the Gulf. There is no reason why oil exporters should peg their currency to the US dollar – or for that matter the currency of any other oil importer with a large current account deficit. Forget about the Turkish lira. If the oil exporters want to peg, they should think about the Canadian dollar …
The net result: Rogoff’s list of policy prescription is far more up to date that the standard “US fiscal, Asian exchange rate flexibility and European structural reform” list. US fiscal and Asian exchange rate changes remain essential, of course. But Europe should get credit for supporting global demand for the past 18 months, and be encouraged to keep it up. And the oil surplus is now too large to be ignored.
Hopefully the G-7 and the IMF will take note.
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Brad–I agree that Rogoff’s list of policy prescription is more up to date. And I also think that Saudi Arabia should better appreciate its currency, and other Gulf states will follow once Saudi appreciates the riyal.
The most fundamental adjustment need is, however, in the US, which must reduce fiscal deficit and increase private saving, and China, which must appreciate its currency and increase consumption. Unless the US and China make their required adjustment, the global imbalances are not likely to be reduced much. It is the task of IMF as well as we economists to persuade the US and Chinese governments to to do so.
Something to watch out for politically… Eurozone leaders in general have much less blind faith in the market, and the economies are much more dependant on imports than in the USA. I would bet EU leaders will not tolerate huge trade deficits, and will go for protectionist measures if the imbalance with China (and Japan) gets out of control. So far it has been quiet in this front, but if say VW starts seriously hurting, you can bet Merkel will start complaining loudly immediately. To say nothing of the French. What UK leadership thinks doesn’t matter that much because it is not in the Eurozone. What I fear is that powers that be in Beijing don’t understand this and simply plan to shift their surpluss from USA to EU.
So the Europeans contribute by going into debt like the Americans? Really, the one goal of economists in America seems to be to make sure that the entire developed world becomes insane consumers like the good ol’ USA.
It’s not my impression that the U.S. has a faith in markets that could be described as ‘blind’ - or that Beijing is not taking a very active interest in Europe - particularly Germany!
Interesting report from Samba Brad - noticed their note of the change in Saudi Arabia’s relationship with China. Thought the Danske Bank report in your Sept. 1 post (thanks) did a good job of highlighting just how different the Eurozone countries are - along with the diversity of their currencies. Whether or not we should be paying more attention to Britain and Sterling.
“The British economy should take over the mantle of a “Goldilocks” economy from the US, the Organisation for Economic Cooperation and Development said yesterday as it sharply revised up its growth forecast for Britain this year…” http://business.guardian.co.uk/story/0,,1865576,00.html
suggest the ‘Dave Chiang’ posts be qualified as a type of spam and treated as such…
To Guest,
I suggest that join in with the CNBC Economist yahoos pretending that everything is always just fine and dandy. The Dot-con stocks were hyped by CNBC market commentators until the bubble bust resulting in huge financial losses by the investing public, and a massive misallocation of capital for the US Economy.
The housing bubble troubles ahead are a serious issue and this is largely symptomatic of the greater shake-out in progress. A significant portion of the American middle class is will be decimated. Housing is about to turn onto another serious problem for the nation. It will join health coverage and cost, pension woes, declining real wages, and massive consumer debt. All of these afflictions are related and interacting.
Regards,
request ‘Guests’ not be such a-holes…
we are privileged w/ an open forum by our kind hosts. if they feel that participants are perpetuating comment spam or are off topic they can delete as necessary or warn members they are crossing the line with the option to ban static IPs as a last resort.
the rest of us are assumed to be mature enough to know that there are a panopoly of views in the world. we should be humble enough to know that our own may not be prominent — indeed rgemonitor would seem to attract many with alternative views (even encouraged to a healthy degree) — but willing to defend those views based on evidence. personal ad hominem attacks are not helpful in this regard and, if i may be presumptuous, discouraged on these boards, especially if they are anonymous. IOW, if you wish to discredit a view, pls attack the subject matter rather than the person. otherwise civil disucssion is degraded… thank you /PSA
cheers!
Chinese FX reserves
US current account
HK wrote: “US, which must reduce fiscal deficit”
This argument is very popular, especially when I talk to Chinese people who hate Bush. And of course, this argument is, sound and correct.
But last time I checked, the US fiscal deficit declined in 2005 by something like $60 billion but the CA deficit increased very much as we all know. Any new thoughts in this regard?
The US economy seems destined to slowdown with oil price rising, inflation rising and Fed rate that has risen. The question is, when the US Quarter GDP growth falls in 4Q, to say 1-1.5%, will those who warned about Global Imabalance be able to say, “Aha, you see. I told you Imbalance will lead to a severe consequence.”
Oil price rising is not directly or significantly related to the CA deficit of the US; I would argue it is more a byproduct of three years of robust global economic growth, low rate leading to speculative move, etc. The USD depreciated in 2003-04 but appreciated last year and did not really depreciate this year either(It depreciated a bit when G-7 and IMF addressed the issue and appreciated back up later after all). The foreign CBs did not slowdown their pace of purchasing US Treasuries after all; hence, inflation in the US is hardly the byproduct of Global Imbalance. On top of that, trade deficit is no longer rising, at least not as rapidly as it was before. While the US economy is slowing too, I wonder how our CA deficit as %GDP will look like. So again, my question: When the US economy slows, is it because of Global Imbalance or was Global Imbalance not a big deal after all?
Brad, thanks for your posts.
teme said: “I would bet EU leaders will not tolerate huge trade deficits, and will go for protectionist measures if the imbalance with China (and Japan) gets out of control”
Though we are not there yet, TEME’s sentiments foretell an increasingly likely outcome to further deterioration. But it is unlikely to be a “hot” trade war, rather a degeneration into some evolved form of “Managed Trade”.
The Eurozone has a wonderfully balanced economy, and in the event of a full-out trade war is in an enviable position in comparison to the Asian neo-mercantilists (overdependant upon exports), or the NAFTA zone. For in their balance is their strength. They arguably have superiority in terms of geography, infrastructure, institutions & rule of law, as well as rapidly integrating its own periphery that represents a self-contained regional source of growth for some time. They have, by design, retained the skills, and all the basic infrastructure set that Americans have needlessly and carelessly given to Asia for short-term gain.
The Europeans WILL vigourously defend their “Community-wide public interests”, which, contrary to America, is more broadly defined than the interests of MNCs that happen to trade in their borders, have deep pockets, and be adept at lobbying.
Lex has Chinese reserves at 959 v $954.5 — and has a monthly pace of growth of around $25b rather than the $15b in the data. I certainly expected $25b … but it doesn’t seem to be there. any one know where Lex is getting its data from?
There is no reason why oil exporters should peg their currency to the US dollar…
Brad, I have noticed that this issue has been brought up many times in the comments section in this blog over the years, but I have yet to see you address it. Specifically, isn’t the reason why the dollar is the world’s reserve currency is that oil is priced in dollars? In turn, aren’t “recycled petrodollars” where oil profits from oil exporters are reinvested in the United States the foundation of our current global financial architecture? (I believe that there was a deal worked out between then-Treasury Secretary William Simon and the Saudis in 1974.) [An extension of this recycled petrodollar architecture (in the capital flow pattern sense) is the so-called Bretton Woods II architecture where export profits from Asian exporters are reinvested in the United States.] According to the conspiracy theorists, one reason why Iran is trying to set up an oil bourse is to end the so-called “dollar hegemony” by having oil also priced in euros. So should oil exporters unpeg their currency to the US dollar, wouldn’t that also unanchor the dollar vis-a-vis its relationship to the pricing of oil? — and how might that impact the dollar’s role as the world’s reserve currency?
Martin Wolf: Share gains with globalisation’s losers
A frequent answer is that a tide of irresistible competition from cheap Asian labour will sweep the economies of the high-income countries into oblivion. Alternatively, those who are slightly less alarmist suggest that wages and salaries in the rich countries will collapse, as Asian pauper labour succeeds in setting the global wage.
Two of the papers at the symposium shed useful light on these anxieties. The first, by Tony Venables of the London School of Economics, noted the entrenched advantages of agglomerations of economic activity.*** Indeed, among the most striking features of economic activity are the gains from proximity. The dominance of a few cities in international finance - at first glance, the world’s most easily tradeable activity - is a superlative demonstration. Prof Venables notes copious research on the gains from proximity: other things being equal, moving from a city of 100,000 to one of 10m raises the productivity of all factors of production by 40 per cent.
The conclusion of this line of analysis is that production will shift only where the benefits of agglomeration are relatively small or the benefits of moving activities are large. Moving back-office functions is an example of the former. Shifting production of clothing to poorer countries is an example of the latter. But the advantages of established centres of expertise are enduring, provided some effort is put into maintaining them: London has been a world-class financial centre for almost three centuries. The relocation of activity will, suggests Prof Venables, prove both difficult and “lumpy”…
The net effects are unpredictable, but the most important point is that offshoring of tasks is equivalent to technological progress. Being opposed to trade is no more reasonable than being opposed to other sources of higher productivity.
What do these analyses tell us? A first conclusion is that developing countries have more reason to fear the entrenched advantages of the high-income countries than the other way round. A second is that there are big gains from the new entrants in world trade: between 1993 and 2004, for example, the prices of US exports rose by 16 per cent relative to those of its imports of manufactures from developing countries. A third is that relatively low-skilled workers may not lose from offshoring, after all. The last is that the rise in trade opportunities is equivalent to a boost in productivity and should be welcomed for exactly the same reason.
The pain of the losers is the reverse side of the overall gains. But it is pain all the same. The need is to find a way of ensuring a broad sharing of the gains. This can be done by subsidising retraining, subsidising the wages of the unskilled or subsidising goods and services that are particularly important for the futures of the unskilled (health and education services being obvious examples). The political challenge is to secure consent to changes that should benefit almost everyone in the long run.
I have made the case why oil exporters shouldn’t peg to the dollar in the blog a thousand times — the fact that oil is priced in dollars is irrelevant. Norway and Canada and Mexico all sell their oil for dollars, but they don’t peg to the dollar. indeed, so long as the price of oil varies in dollars, most countries would be better off with a currency that appreciated and depreciated in line with oil — it would tend to even out oil revenue in local currency terms, which is what matters.
As for petrodollar recycling — the currency used to denominated oil exporters surplus does matter, but whatever deals were made in 74 have long since been superseded. the US-Saudi relationship has evolved — No more US airbases (at least overt ones) are there, for one. Most of the oil surplus is in dollars right now, but that is not intrinsic to the fact that oil is priced in dollars. it may reflect the fact that the oil surplus is now so huge that it can only be recycled into an equally huge economy. but that is a different issue.
Hi Brad,
Under a secret Kissinger agreement inked between the Gulf Arab states and the United States, the recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil.
While Saudi Arabian-US relationship has frayed somewhat, the US military continues to station massive forces across the Middle East. Immediately after the US invasion of Iraq by the Bush Administration, the Iraqi Central bank switched from accepting the Euro to only US dollars for its energy exports. Is it just a coincidence that both Bush and Cheney have similar oil industry backgrounds? Does anyone in the world really believe that the Iraq invasion was only about democracy rather than the exploitation of that nation’s strategic energy reserves?
Iraq’s conventional oil reserves are ranked as second largest after Saudi Arabia. North Korea may have a nuclear tipped missile aimed at Los Angeles, but Iraq has the oil.
Regards,
I’d say the oil was a factor, but not the factor. I think that Bush, Cheney, etc actually believed that the occupation would go a lot better. They wanted to transform the middle east starting with Iraq and if cheap oil from Iraq would be one consequence that would be an added benefit.
As for Germany’s VAT increase being a mistake … that remains to be seen. Growth forecasts for the German economy in 2007 range from JP Morgan’s 2.2% to Deutsche Bank’s 0.6%. It seems economists really aren’t sure what will happen. I guess you can call that “risky”, but whether it’s a mistake is another question.
This conspiracy theory keeps popping up. I have to deal with it a lot myself. I appreciate that “ordinary” (noneconomist) political junkies are beginning to recognize the importance of the dollar’s precarious position, but it doesn’t help to get the analysis wrong. As you (Brad) and others have pointed out, it isn’t the mechanics of how particular trades are conducted that matters so much as where the moolah ends up. Oil could be priced in dollars, euros or shiny beads, but the important thing is how the sellers of oil dispose of their cash. If oil is priced in euros, a Brazilian buyer can exchange reals for euros, but the moment of truth comes when those euros arrive, say, in Saudi Arabia. If the Saudi royals turn around and exchange them for dollars and park them in a dollar account in London, the intervening moment of glory for the euro doesn’t amount to much.
Follow the money. (That’s the slogan of this blog, isn’t it?)
The Bushies did a “once off” corporation tax offer of 5.35% in 2005 for repatriated profits. Oracle shifted $800 million alone in that year posting a loss in Ireland. I think therein lies the decline in the fiscal deficit for 2005, now onwards and upwards!
Yeah, what Cassandra says. only, CEE’s ‘a self-contained regional source of growth,’ but also lots o’ concentrated systemic risk, it would seem. Anybody mind that?